Rewarding habits

Regular savers enjoy 50% average rise in 401(k) account balances

SAN FRANCISCO (MarketWatch) -- Retirement savers who stuck with their 401(k)s enjoyed watching their account balances grow 50% over the past six years -- and 10% in 2005 alone -- according to a study released Thursday.

Consistent contributions and recent stock-market gains pushed the average 401(k) balance 50% higher to $102,104 at the end of 2005, from $67,785 in 1999, according to an annual study by the Employee Benefit Research Institute and the Investment Company Institute, focusing mainly on the accounts of 3.5 million savers who participated in plans throughout those six years.

"Our analysis shows that the discipline of saving through a 401(k) plan continues to pay off for these plan participants, despite enduring one of the worst bear markets since the Great Depression," said Sarah Holden, senior economist with ICI, in a conference call to announce the report's findings.

"Participants who are in a plan and who stick with saving little by little, year by year, will build significant account balances," she said.

The report does not distinguish account gains reaped through a worker's contributions versus those from stock market returns.

"It represents both," said Jack VanDerhei, a professor at Temple University and an EBRI fellow. "It's a combination of contributions and market appreciation. The overriding point is if you contribute steadily the market will do what the market is going to do, but you can have a decent outcome over time."

The percentage gains mask wide disparities by age. Workers in their twenties enjoyed account-balance gains averaging 695% -- to $24,169 in 2005 from $3,042 in 1999 -- because of the effect contributions have on those workers' small account balances.

Workers in their sixties saw an average gain of 12% in the six years through year-end 2005, to $140,957 from $125,811.

Meanwhile, the median account balance at year-end, with half of account balances above and half below, was just $54,591. Still, that's more than double the median account balance of $24,371 in 1999, according to the report.

Steady savers vs. workers overall

The 3.5 million savers who have participated in one plan consistently for six years are just part of the overall EBRI/ICI database, which includes information on 17.6 million 401(k) plan participants in 47,256 plans with more than $1.0 trillion in assets.

That represents about 37% of the total market of 47 million U.S. workers participating in 401(k) plans, with an estimated $2.4 trillion in assets.

Looking at that broader database, the average account balance is $58,328, and the median balance is $19,398.

But younger and newly-hired workers' small account balances skew those figures, the study's authors say. For instance, a worker with a $100,000 401(k) account balance who rolls that balance into an IRA when switching jobs is counted as having only the much lower account balance at the new job.

"That could be misinterpreted as 401(k) participants were hurt," Holden said. The report's authors say focusing on consistent savers' account balances - the figures cited in the beginning of this story -- provides a better picture of how 401(k) plans serve workers. "The question we want to ask is what are 401(k) plans doing for workers?" she said.

Stock choices

Two-thirds of 401(k) plan participants invest in equities, through stock funds, the equity portion of balanced funds, and company stock. That figure that has stayed roughly the same for 10 years, according to the report, based on the full database of 17.6 million savers.

A good portion of savers invest heavily in equities: 40% of participants have more than 80% of their account balance in equities.

Still, 18.5% of younger savers -- those in their twenties -- choose to avoid equities altogether, compared with 15% of the total group of plan participants who don't invest in equities.

"Given the long-term horizon that they're looking at, you wonder perhaps whether they might benefit from some financial advice or from turning to one of these packaged allocations such as a lifecycle or lifestyle fund," Holden said.

Investors opt for a variety of paths into the equities market. As a percentage of total 401(k) plan assets, 48% are in equity funds, down from 53% in 1999 but up from 44% in 1996.

Continuing a trend largely driven by the Enron debacle, fewer plan participants are opting to invest in company stock: 13%, down from 19% in 1996.

And savers are increasingly looking for simplicity when it comes to asset allocation, with a growing number opting for life-cyle and lifestyle funds, which require less decision-making on the participant's part.

Assets invested in balanced funds have been rising, with 11% invested there in 2005, up from 8% in 1996.

New hires seem to be particularly eager for balanced funds, with 40% of new hires opting for balanced funds in 2005, up from 29% of new hires in 1998.

And they're putting an increasing portion of their account into those funds. Among new hires who invest in balanced funds, 41% have more than 90% of their account balance in these ease-of-use funds that allocate assets based on the investor's risk tolerance or expected retirement date.

Meanwhile, 10% of overall plan assets are in bond funds, 13% are in guaranteed investment contracts and other stable value funds, and 4% are in money funds, as of year-end 2005.

Leaving the loans alone

Few 401(k) participants borrow from their plans, with 19% holding a loan in 2005, and that drops to 10% for those savers who are near retirement.

The average unpaid balance among those who have loans is $6,821 and tends to represent about 13% of the remaining account balance.

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